Primum non no cere

Written by Scott Fulton, Co-CIO and Co-Host of Keanaissance

On 1st June 1980, Rush played the Southampton Gaumont on their Permanent Waves tour. During the set, the band played Freewill, whose lyrics, written by the drummer Neil Peart, include the line:

If you choose not to decide, you still have made a choice.

Long of hair and short of philosophical direction, your correspondent took this to heart and deployed its lyrical cleverness to great effect in a range of economic, social, and romantic discussions over the subsequent 42 years.

It is likely that John Stuart Mill (1806 – 1873) would disagree with Peart. A philosopher, political economist and campaigner, his support for causes such as the abolition of slavery and women’s rights marked him as a man out of time or, perhaps, ahead of it. He left a lasting legacy within utilitarianism in which he described its goal as to achieve “the greatest good for the greatest number”.

Yet Mill was also the source of the maxim, “the only thing necessary for evil to triumph is for good men to do nothing.” While the exact wording is disputed, and often ascribed to Edmund Burke incorrectly, the call to action, implied by the phrase, has coloured political debate since the 19th Century.

Suffice it to say, J.S. Mill thought, and wrote, a lot about the doing of good and the choices that generate it. He was, in this context, pro-choice.

Economically, a “good” is characterised as having scarcity and opportunity cost. Its value is determined by choice. If you choose to buy a car today, it is not available to another buyer today (scarcity). If you choose to buy a car, you cannot also buy a truck (opportunity cost). Your perception of value, set in those terms, will determine your choices.

Politically, this characterization appears, also, to apply. Specifically, choice is central to any approach to public “good”. Making choices between welfare, infrastructure, or defence, for example, is at the heart of most debate now and for what seems a long time.

For some time, economic and political “choices” have seemed at odds. The total costs of the Pandemic are unlikely to be seen as a choice, given that the opportunity cost of not spending was a far higher death toll. However, the choices faced in order to recoup or mitigate these costs all now fall squarely onto how to achieve the greatest good for the greatest number. Political cost is measured by the votes lost by a group not so helped. Economic cost is measured by the utility lost by those most affected.

It is unarguable that there is an inherent conflict between these two groups and the costs implied, and it is best defined by inflation.

Traditional theory has inflation as a corroding effect on economies which, if unchecked, leads to hyperinflation. Since the 1973-4 oil price shock, addressing this issue has been left to the monetarist school of economics which has long argued, successfully, that interest rates are the most appropriate policy tool with which to combat rising prices. This argument appears to persist as monetary authorities around the world have increased rates.

There is something of the late 1970s about our economic position in 2022. The Pandemic notwithstanding, there are wars, and the price of oil has increased. Economic responses now, as then, are couched in terms of “belt tightening”, “long road ahead”, and “worse before it gets better”.

However, in our opinion, the emerging policy response is not axiomatic. It is a choice.

More importantly, it appears to be a choice based on the pre-Pandemic world and its economic and political structures. For example:

  • Total personal debt in the G7 has fallen during the Pandemic, reducing the effectiveness of interest rate increases on spending. Total savings are also at high levels, reflecting the reduction in debt, reducing the effectiveness of interest rate increases on the savings ratio:
  • Almost all price indices used as policy benchmarks in the G7 have risen due to imported inflation, notably in hydrocarbon costs. Increases in regional or national interest rates will not impact these prices as they are denominated in US dollars, which currency is unlikely to move sufficiently in relation to the Euro or to Sterling to make a difference to national prices.

Faced with inflation at high levels, policy makers and Central Banks have reached for the interest rate lever. We suspect that they know this will have a limited impact in the short to medium term. The causes of inflation are the Pandemic and the War in Ukraine. Urging national pay restraint and increasing the cost of debt will not resolve these issues.

In an attempt to “do something”, our monetary authorities should consider the merits of doing nothing. Hyperinflation, the bogeyman beloved of Central Bankers, is caused by Government deficits being funded through currency creation without a corresponding increase in production of goods and services. It has occurred several times, almost always during or after a conflict. France in 1786, Germany in 1922, and Greece in 1941. In all cases, the contamination effect of this inflation moving to other countries was cancelled by the adoption of other methods of exchange or other currencies: gold or the US Dollar.

As we witness a parade of Treasury Ministers and Central Bankers lament the rise in prices and raise the cost of debt, we should ask what if we do nothing?

The markets are moving towards currency co-ordination. It is likely that Central Banks will issue Cryptocurrencies in their own image within the decade. Ahead of that, international trade will continue to be dominated by the US Dollar, possible more so as the costs of unwinding the logjams of the Pandemic do not need to be added to by forex costs. Oil and gas prices will remain relatively high but national and international efforts to replace Russian supply will accelerate the trend to non-oil use as much as a relocation of demand to MENA and South America.

It is worth referencing Adam Smith, the father of economics and a contemporary of Mill. In 1759, Smith published The Theory of Moral Sentiments in which he introduced the concept of the Invisible Hand. This argues that, left to their own devices, entrepreneurs will allocate capital, manage production, and set prices to maximise their own returns but, in so doing, the economic ecosystem in which they operate achieves equilibrium without the need for organisation or intervention.

In other words, Governments – national or supranational – should collect taxes, spend the money raised wisely on infrastructure, welfare, and defence, and leave the economies, on which they rely for their treasure, alone. Hold the ring by all means but let the actors within play on and play well.

Neil Peart, one of the greatest rock drummers of all time, died on 7th January 2020.

This is the penultimate article in the Keanaissance Series, articles which highlight concepts and trends which are important to VIP and, we hope, of interest to our audience. The articles preview the discussions and presentations VIP will host at Keanaissance on the Island of Kea from 2nd June 2022.

Scott Fulton is an economics graduate and a capital markets specialist. From 1988 until 2000, he worked within London’s equity capital market as an Extel rated analyst in the Building and Construction sector for, amongst others, Bank of America Merrill Lynch, Credit Suisse and ABN Amro. From 2000, Scott moved into financial public relations and investor relations (“FPR” and “IR”). He was the director responsible for IR and M&A at Financial Dynamics (now FTI), Citigate Dewe Rogerson (CDR), Just Retirement plc (now Just Group) and Asda Burson Marsteller (UAE). On returning from the Gulf in 2015, Scott re-joined investment analysis at Whitman Howard (recently sold to Panmure Gordon) before moving into Proxy Solicitation, specialising in M&A, at Equiniti plc. Through his professional career, Scott has focused on and developed skills in investor relations.

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